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Earned Time – Payout – Termination

Our employees gain their vacation, sick and personal time in one bucket which we call Earned Time. We have a policy in place that states if an employee terminates before completing one year of continuous employment they will not be paid for Earned Time not taken.

This does not sit well with me. Is there a Massachusetts law that we are in compliance and we don’t have to?


Under Masachusetts law, an employee must be paid at terminaton for any vacation time that the employee would have been entitled to use (under company policy) on his or her last day of work. However, this does not include sick leave or personal leave.

First of all, what your company is calling Earned Time is actually a version of PTO, Paid Time Off. And we might add, Earned Time is a very poor choice of name for this time off. That is because accrued time off is not necessarily earned time off. At most companies, an employee accrues time off (whether it is called vacation, sick or PTO time) during the first year. However, the employee is not entitled to use the time off — it is not earned — until the employees first anniversary. So it is not clear whether what you are calling Earned Time is actually earned, or merely accrued.

Example: Jon is a new employee at XYZ company. After 6 months, Jons paystub shows that he has accrued 10 hours of PTO. However, Jon is not entitled to use this time off until his first anniversary with the company. So Jons 10 hours are accrued but not earned. If he quits now, he is not entitled to payment for any portion of the PTO. (If Jons company permitted him to use his vacation/PTO from the first day of employment, then he would be entitled to payment for it. But very, very few companies permit this.)

Some companies permit employees to take time off before they have earned it, and pay it back at a later date. Example: Tina has no vacation left in February, but wants to take a 2-week honeymoon. She will have 2 weeks of earned — not accrued — vacation time on March 1. Tinas employer permits her to use her two weeks of vacation in February instead of March. There is no law that an employer must permit workers to do this, but some do. If Tina did not take any vacation, and quit on February 1, she would not be entitled to payment for the two weeks of vacation — because she has not yet earned it. If Tina quit on March 2, she would be entitled to payment for the earned vacation.

Finally, the Massachusetts law applies only to vacation time, not all Paid Time Off, PTO, or Earned Time, (if that is what your company persists in calling it.) When a Massachusetts company lumps all time off together, the employer gets to determine how much of the earned PTO is comparable to vacation time. And that is the portion that must be paid to the worker at termination.

There are a few restrictions on the employers determination of what percentage of PTO is vacation pay. It needs to be consistent between employees. And, it needs to be reasonable. If the employee has 20 days of PTO per year, the employer cannot claim that only 1 day is comparable to vacation time, and 19 days are comparable to sick time. It would be reasonable for the employer to claim that 10 of the 20 days were comparable to vacation time and the rest were comparable to sick leave or personal time off.

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This entry was posted on Wednesday, January 21st, 2009 at 12:08 pm and is filed under
Benefits, Human Resources Management.
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